Negative sovereign rating actions exceeded positive actions in the first half of 2014 in Latin America and the Caribbean, according to Fitch Ratings. While the Rating Outlooks for most countries in the region remain Stable, Negative bias remains for ratings as currently more countries have Negative Outlooks than Positive Outlooks.
Fitch downgraded the sovereign ratings of Bermuda, Guatemala and Venezuela by one notch each during the first half of 2014. However, Fitch also took two positive rating actions in the region, upgrading Jamaica to ‘B-‘ from ‘CCC’ and assigning a Positive Outlook to Paraguay.
The Stable Rating Outlooks for the majority of sovereigns in the region suggest that positive and negative rating pressures are balanced. Currently, only Paraguay has a Positive Outlook while Argentina (Local IDR only), Aruba, El Salvador and Venezuela have Negative Outlooks.
‘Softer commodity prices, China’s slowdown, slower domestic demand and country-specific factors are clouding the near-term prospects of the Latin American region,’ said Shelly Shetty, Head of Fitch’s Latin America Sovereigns Group. ‘Structural constraints including low investment rates and infrastructure gaps, are also biting in some countries and highlight the need for a broader reform effort to improve the medium term growth trajectory,’ she added. Slower growth will likely constrain improvements in fiscal and external solvency ratios and dampen the sovereign credit momentum in the region, particularly as the rating cycle for the region has been quite positive in recent years.
At the same time, Fitch does not anticipate broad-based negative rating actions either as several Latin American countries have adequate external liquidity and credible policies in place to confront potential higher international volatility. Market access remains relatively robust for most countries. Fiscal room to stimulate domestic economies is more constrained although countries like Chile and Peru with countercyclical buffers and low government debt burdens have room to implement such policies.
Fitch is projecting Latin America’s real GDP growth will reach 1.9% in 2014 compared to 2.6% last year with modest recovery expected in 2015. The regional growth forecast masks important differences between countries. Brazil and Mexico are likely to under-perform this year with growth in the former reaching only 1.5% and remaining below 3% in the latter. Even the previously fast growing Chilean economy is losing steam as it confronts lower copper prices and China’s deceleration. Growth will also slow although remain relatively robust in Bolivia, Panama, Paraguay and Peru, while Colombia and the Dominican Republic are the only economies expected to accelerate this year. On the other hand, Argentina and Venezuela will likely experience recession.
Among the inflation targeting countries inflation remains elevated in Brazil and Uruguay. Chile, Mexico and Peru have cut interest rates amid slowing growth. Brazil has halted its monetary tightening cycle arguing the impact of the rate increases is cumulative and operates with a lag. Colombia is the only country in a tightening mode given its robust domestic demand dynamics. Argentina and Venezuela will continue to have the highest inflation rates in the region.
A gradual fiscal deterioration is forecasted in 2014 for several countries due to slower growth, lower commodity prices and continued spending pressures amid a heavy electoral calendar. The two largest economies of Brazil and Mexico will see higher deficits this year. Aruba, Costa Rica, El Salvador and Suriname will incur among the highest deficits in the region (surpassing 4.5% of GDP in each case). Only Bolivia and Peru are forecasted to run a small surplus or near balanced budget positions. Commodity dependent and recession-stricken economies of Argentina and Venezuela will have to manage their fiscal accounts within the constraints imposed by their limited financing options. Nevertheless, the modifications to Venezuela’s FX regime and the weaker average official exchange rate will likely benefit government oil receipts.
The regional current account deficit is forecasted to reach 2.6% of GDP in 2014. Current account deficits remain elevated in several countries including Brazil, Costa Rica, El Salvador, Jamaica, Panama and Uruguay. However, in most cases, external vulnerability is mitigated by healthy external reserves cushion, the continued resilience of FDI flows and access to markets and multilaterals. On the other hand, international reserves of Argentina and Venezuela have faced pressure over the past year. While they have stabilized in recent months, Fitch will continue to monitor their trajectory as significant drainage could further undermine their external debt repayment capacity.
The electoral calendar was heavy in the first half of 2014 with Presidential elections held in Colombia, Costa Rica, El Salvador and Panama. The election outcomes do not materially impact sovereign credit trends in these countries. However, countries like El Salvador and Costa Rica face the challenge of implementing fiscal reforms to secure better fiscal and government debt trajectories. Bolivia, Brazil and Uruguay will hold elections in the second half of 2014. The Bolivian President Evo Morales is expected to win the re-election bid which would imply broad policy continuity. Uruguay’s market friendly policies are likely to remain in place after the elections in which former President Tabare Vasquez is the current frontrunner. The polls in Brazil suggest that the likelihood of a second round have increased. Regardless of the electoral outcome, the next administration will confront the challenge of making policy adjustments to reduce the existing macroeconomic imbalances and take measures to boost confidence and competiveness of the economy. Political polarization will remain high in Venezuela and could make it difficult for the government to make faster progress on the much needed policy adjustments to ease foreign exchange constraints and address issues of scarcity, crime and very high inflation. Periodic periods of social instability cannot be ruled in Venezuela.
Material structural reforms to boost the lagging productivity growth in the region have not made significant headway. Mexico is the only exception where the government has been making progress on long-standing issues.